For the second month, repeat the process but start with the remaining principal amount from the first month’s calculation.Next is to subtract the interest from the monthly installment amount the remaining amount goes as the principal.In the case of monthly installments, divide the result of step 1 by 12 to get the monthly interest amount.In the first month, multiply the total amount of the loan by the interest rate.So, here’s a step-by-step guide to calculating amortization. To access information on calculating amortization, we need to consider both the scenarios -Ĭalculation of amortization is a lot easier when you know what the monthly loan amount is. It is often used with depreciation synonymously, which theoretically refers to the same for physical assets.Īt times, amortization is also defined as a process of repayment of a loan on a regular schedule over a certain period. It also implies paying off or reducing the initial price through regular payments.įinancially, amortization can be termed as a tax deduction for the progressive consumption of an asset's value, in particular an intangible asset. In general, to amortize is to write off the initial cost of a component or asset over a certain span of time. A write-off schedule is employed to reduce an existing loan balance through installment payments, for example, a mortgage or a car loan. The second situation, amortization may refer to the debt by regular main and interest payments over time. In simple terms, amortization in accounting decreases the value of an intangible asset gradually and presents an expense in the revenue/ income statement to recognize the change on the balance sheet for the given period. Owing to this, the tangible assets are depreciated over time and the intangible ones are amortized. Like the wear and tear in the physical or tangible assets, the intangible assets also wear down. A company needs to assign value to these intangible assets that have a limited useful life. The intangible assets have a finite useful life which is measured by obsolescence, expiry of contracts, or other factors. If you happen to fall in either of the categories, then this article is for you.įrom this article, we shall be learning about:Īmortization applies to two situations: intangible assets and paying off a loan Amortization could apply in two situations: while taking a loan or in a business where intangible assets are concerned.
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